Robust Canadian growth boosts chances of rate hike as some eye Sept

OTTAWA (Reuters) - Canada’s economy grew at its best pace in nearly six years in the second quarter amid robust consumer spending and energy exports, raising expectations another interest rate hike could come as early as next week.

Gross domestic product grew at an annualized 4.5 percent, Statistics Canada said on Thursday, handily topping forecasts for 3.7 percent and making for the best pace of growth since the third quarter of 2011.

Better-than-expected June growth also suggested the economy could have more momentum than anticipated in the second half of the year. Canada has emerged as the fastest growing economy of any country in the G7 group of major develop economies.

The figures lifted the Canadian dollar and market bets of a rate increase in the next two months, with one economist bringing his forecast for a hike forward to September.

Canada’s performance in the first six months of the year was the strongest since 2002 on a non-annualized basis and has made the country a growth leader among its industrialized peers two years after it was hit by lower oil prices.

“It’s very hard to poke holes in this number,” said Frances Donald, senior economist at Manulife Asset Management. “This is a strong performance from the Canadian economy, not just in the second quarter but in the entire first half of the year.”

Second-quarter growth was substantially above the Bank of Canada’s forecast and extended a recent strong run for the economy that prompted the central bank to raise rates in July for the first time in seven years.

Consumers continued to prop up growth in the second quarter, with household consumption up an annualized 4.6 percent as Canadians spent on vehicles.

Exports also rose on the back of increased shipments of energy products, including crude oil and bitumen, as prices for such products fell.

Business investment on non-residential structures, machinery and equipment rose 7.1 percent. Inventories also rose, particularly in the manufacturing and trade sectors.

RATE HIKE EXPECTATIONS

Economic forecasters at CIBC changed their call for a rate hike to September from October in light of the strong figures.

“The bank can clearly argue that the economy simply doesn’t need rates as low as they have been to generate decent economic growth,” chief economist Avery Shenfeld wrote.

Markets see a 37.8 percent chance the bank will raise rates again at its next meeting in September, up from 20.9 percent odds ahead of the data. Most are betting on an October hike, with the likelihood at 86.8 percent, up from 72.4 percent.

There were signs the housing market weakened in the quarter, with investment in residential structures down.

That was due to a sharp decline in ownership transfer costs, the statistics agency said. Home sales in Toronto have fallen since the provincial government took a number of steps in April to rein in the hot market, including a tax on foreign buyers.